Ask any business executive about government regulation, and he will tell you a horror story of bureaucratic excess. This is his version of the Rot at the Top. But the executive will not, most likely, object to the goal of regulation. Most executives agree that the public deserves protection from toxic wastes, nuclear accidents, air and water pollutants, unsafe products, fraudulent claims, and monopoly. Even in eras like the present, when business is ascendant and government suspect, the public supports these broad objectives. The complaints of American business center not on the purposes of regulation, but on the ways they are designed and implemented: Statutes are overly complicated; the rules devised to fulfill them are excruciatingly detailed, comprising voluminous rulings and interpretations, interpretations of interpretations, opinions and dissenting opinions of interpretations of interpretations. Even the simplest public goal spawns an imposing herd of rules requiring exhaustive filings, reports, nitpicking inspections, and picayune compliance with every jot and tittle of the law. And they are subject to constant alteration, elaboration, and ever more detailed explication. Under the spell of congressional committees, regulatory agency officials, hearing examiners, administrative law judges, appellate judges, and scores of zealous government lawyers, inspectors, and bureaucrats, regulations grow more complicated by the hour. They multiply in the Federal Register; they engorge the Code of Federal Regulations; they inundate companies with their petty requirements.
Tales of bureaucratic atrocities abound. The chairman of one large pharmaceutical firm complains that his company spends more hours filling out government forms and reports than it does on research for cancer and heart disease combined.1 Others tell of trivial, often silly requirements, like giving loan applicants pages of detailed information that nobody ever reads, or putting a toilet within one hundred yards of each employee. The laws are impenetrable: The Employee Retirement Income Security Act, which regulates private pension plans, runs to more than two hundred pages. It has been estimated that federal agencies each year require American businesses to fill out 4,400 different forms, together consuming 143 million hours of executive and clerical time, and costing $25 billion.2
Nitpicking regulation has been blamed for slowing America’s productivity and impairing the nation’s competitiveness.3 Yet other advanced industrial nations require that their companies achieve similar regulatory goals. Environmental, health, and safety requirements in Japan and most of Western Europe are no less stringent than in the United States.
There is one significant difference, however. Although the results of regulation are about the same among all advanced nations, the means of regulating are quite distinct. In these other nations, regulations are far less detailed than they are in the United States. Their regulations involve fewer rules and interpretations, impose less paperwork, entail only informal inspections and reports, and generate significantly lower compliance costs. If American business is conspicuously burdened by government regulation, it is not due to the ends that regulation seeks, but to the means employed. Among advanced industrial nations, the regulation of American business is uniquely picayune.4 Why should this be so?
Many who speak from or for American business attribute the trouble to the attitudes and values of the people who inhabit government regulatory agencies: These people want to be nettlesome. In this story, the Rot at the Top is traceable to a “new class” of college-educated social planners and public policy professionals who disdain economic growth and abhor private enterprise. In the words of Irving Kristol, a principal exponent of such views, regulators and their fellow travelers “find it convenient to believe the worst about business because they have certain adverse intentions toward the business community to begin with.” They seek “the power to shape our civilization—a power which, in the capitalist system, is supposed to reside in the free market.” Their ambition is “to see much of this power redistributed to government, where they will have a major say in how it is exercised [emphasis in the original].”5
In this story, many denizens of the new class populate the staffs of regulatory agencies—surviving administration after administration. These individuals relish any chance to harass American business with endless, trivial commands, to clog the channels of commerce with their piddling requirements and endless forms. They take delight in transforming commonsensical regulatory goals into reams of irritating detail. According to Kristol and others who share his views, the new class is waging a war of attrition against capitalism.
The New Regulation [to protect the environment, safety, and health] is the social policy of the new class.… They have merely transferred power from those who produce material goods to those who produce ideological ones—to the intellectuals, policy professionals, journalists, and “reformers,” who are arguably much less representative of the American people as a whole than those whose influence has been curtailed.… With each passing year it becomes clearer that the real animus of the new class is not so much against business or technology as against the liberal values served by corporate capitalism and the benefits these institutions provide to the broad mass of the American people.6
This conspiracy has proven to be an oddly comforting phantom for American businessmen. First, it provides a ready explanation for why business has felt so besieged. It is not any serious failings or erosion of legitimacy on the part of industry, but rather the machinations of a group bent on undermining free enterprise. It is an enemy within, an ally of the Mob at the Gates that seeks to substitute centralized planning for free markets. Second, the story suggests a plan of action. All we need do is to expel from government these ideological traitors and put in their place teams of levelheaded and unbiased civil servants. (Hunting out the miscreants should be no problem; they leave a trail of red tape wherever they wander.) Finally, the story promises a happy ending. Once these saboteurs have been ejected, the present regulatory miasma will be transformed into simple, sensible rules. The public will continue to be protected—as it should be—from the irresponsible acts of a few misguided managers. The rest of American business will be freed of the nitpicks, technicalities, and meticulous excesses of the present system.
Unfortunately for those who find the story satisfying, it wilts in the face of the facts. To begin with, the “new class” of interventionist zealots who are supposedly responsible for the picayune character of so much modern regulation have been far harder to track down than expected. Both the Carter and Reagan administrations were committed to reducing the burden of government regulation. The latter, indeed, installed its own counterzealots at the controlling levels of government agencies to track down the guilty parties. The Reagan administration did succeed in abandoning some regulatory efforts. But—and here is the important point—it did nothing to change the way in which the remaining regulations were administered. Notwithstanding its concerted efforts, the Code of Federal Regulations continued to swell with detail, the Federal Register bulged with new interpretations and elaborations, and American business continued to writhe under the burden of pettifogging directives from Washington. The underlying problem had nothing to do with nefarious forces hidden within regulatory agencies; it was inherent in the American regulatory process itself. A probusiness administration might succeed in rescinding particular regulations, but not in reducing the amount of niggling minutiae surrounding any regulatory goal that survived.
In addition, it turns out that the vast majority of regulatory agency lawyers and middle-level managers aspire not to undermine American capitalism but to live off it. After gaining experience in government, they move on to the private sector. They gain jobs in law firms, representing companies before regulatory agencies. They join consulting firms, accounting firms, research institutes, and public relations firms. They move into government affairs offices of large corporations, and into trade associations. Some have even been known to join university faculties, from where they sell extracurricular insights to corporations. Their experience in government makes them valuable to the private sector, and they are not reluctant to trade upon that value. Far from comprising a “new class” of intellectuals animated by an antibusiness bias, these former civil servants prove themselves adept at making money off what they have to sell—their inside knowledge of how regulations are made. They bring as much zealousness to their newfound corporate jobs as they did to their former ones.
If America’s regulatory miasma is not due to a covert war against capitalism waged within government agencies, then what is the real cause?
Let us return to our inventor friend, Henry, and his turbo-charged automatic vacuum cleaner. (You remember: Just leave the vacuum on a shelf for five minutes and—presto!—the room is spanking clean.) Imagine, as before, that the product proves enormously popular. But this time imagine that it suffers from a small flaw: It emits a roar something like a jet engine at full throttle, but louder. Every time the machine is switched on, the noise loosens tooth fillings and induces deep neurosis in dogs within a radius of two hundred yards. This flaw does not deter consumers from using the vacuum; following operating instructions, they simply set the timer, sedate the dog, and go off to the movies while the machine cuts loose. Soon in neighborhoods all over America the vacuum’s roar issues from empty houses, causing flocks of passing birds to fall stunned from the sky and neighbors at table to drop plates and fling drinks into the air. Henry would like to make a quieter version of the product, but so far has had no luck; adding an adequate muffler would triple the cost of the vacuum.
Now suppose that several years before all this Congress had instructed the Environmental Protection Agency to take steps to “ensure no household appliance emits excessive noise.” That was all the legislation said. Congress decided to leave it to the EPA to devise and enforce regulations concerning neighborhood noise pollution. Since then, the agency has issued only one broad rule: “No consumer product shall generate noise in excess of 110 decibels.” That’s it—nothing more specific than this, no reporting requirements, no interpretations, no elaborations. The EPA publishes the rule and considers the problem settled.
Henry has hired a Washington lawyer named Seymour, who informs him of the EPA’s regulation. Worried about the threat to his company, Henry asks Seymour if he can think of some legal way to continue selling the turbo-charged vacuum cleaner. Seymour is a smart lawyer who specializes in federal regulations. “Not to worry,” Seymour assures Henry. “I can think of two hundred ways to dodge this regulation.” Henry rests easier.
Two months later, the EPA inquires about the vacuum. It seems they have been getting complaints about its noise. Seymour meets with the EPA’s attorney. “The regulation doesn’t apply to the turbo-charged automatic vacuum,” says Seymour, matter-of-factly. “It says no consumer product should emit a sound in excess of 110 decibels, but this isn’t a consumer product. It’s designed for industrial applications, although consumers happen to use it. And it’s not even a product, but a service, since under our unique payment plan it is leased rather than purchased outright.” The EPA attorneys silently take off their hats to Seymour and go back to their law books and word processors.
Two months after that, the EPA announces a more detailed set of rulings, which define “consumer product” as “any product or service sold or leased to industrial or consumer users.” They then return to Seymour’s office. “Still doesn’t apply,” says Seymour calmly. “The regulation prohibits sounds in excess of 110 decibels. But our automatic vacuum records only 95 decibels when we’ve tested it outside in the middle of a field during a hailstorm. Here’s the proof.” He hands the EPA attorneys computerized results of the experiment. They take off their hats again, solemnly shake his hand, and drag back to the office.
Two months later, the EPA announces precise specifications for how such products are to be tested to determine decibel levels—the kind of sound chamber in which testing is to occur, the type of testing equipment, scientific definitions for “decibel,” and detailed requirements for when the testing must be done and under whose auspices. The agency also announces that hereafter all manufacturers of a new product “designed for or adaptable to household use” must file a report with the agency indicating its decibel level according to the prescribed test. All over America, developers of new cat beds, corn poppers, and sock matchers fume as they pay for the premarketing decibel tests Washington demands.
Over the next several years Seymour meets with the EPA attorneys innumerable times. Each time, he claims that the burgeoning regulations, rules, and interpretations still do not apply. Each time thereafter, they become more detailed. Seymour also disputes their applicability before administrative law judges and he appeals their rulings to the federal courts. He argues, as the occasion warrants and the spirit moves him, that the EPA has exceeded its mandate from Congress, or that the agency has acted arbitrarily in singling out the turbo-charged automatic vacuum, or that the company’s constitutional rights have been violated. The administrative judges and appellate courts issue opinions that further elaborate upon the EPA’s regulations and interpretations, and its authority to regulate in this area. Meanwhile, the original statute has been amended by Congress to avoid the loopholes and ambiguities that Seymour (and others like him) have discovered. The new law is far more detailed and complex, spelling out in excruciating specificity what is required.
Five years later, Henry meets with Seymour. “I’m afraid,” says Seymour, “we’ve reached the end of the line.” Seymour points to a bookshelf sagging under the weight of statutes, EPA regulations, rulings, advisory opinions, interpretations, court opinions, and appellate decisions, all concerning noise pollution. “But at least I got you more than five years of delay.” Henry is downcast nonetheless. “Does this mean we have to stop selling the turbo-charged automatic vacuum, or else install the muffler?” he asks. “Either that,” Seymour warns, “or you’ll have to pay the fine every year you violate the regulation.” “How much?” Henry asks, trembling. “A full twenty-five hundred American dollars,” Seymour says as he grins and takes off his hat to himself. Henry jubilantly goes back to his company, where he asks his secretary to organize a bake sale to cover the fine.
This example exaggerates, but not much, the typical fate of a regulatory effort. It describes a familiar dynamic between American business and government. American corporations are not reluctant to test the limits of the law. They pay lawyers handsome sums to discover loopholes, technicalities, and elegant circumventions. In many instances the investment is worth it to the corporation. It buys the firm at least temporary relief from a regulation, enabling the company to profitably continue doing what it was doing before. Nor do American lawyers recoil from the challenge. They relish it. They cultivate reputations for their elegant pirouettes around statutes. The art of Washington practice is to stake out an area of government regulation and then become expert at outwitting those who administer it. Talented people have been known to spend entire careers circumventing a single, arcane area of regulation for the benefit of a few corporations.
This ploy may be rational from the standpoint of the lawyer and his client, but it is often irrational for American business as a whole. Each such maneuver generates a countermaneuver from within the regulatory bureaucracy and Congress; every feint and dodge, a more complicated prophylactic for the next encounter. The result, over time, is a profusion of legislative and regulatory detail that confounds American business. The underlying dynamic is analogous to the commercial gridlock examined earlier, and the crippling dilemma of irresponsibility in social programs, which was also explored. American business finds itself strangled by the red tape that government uses to seal the loopholes through which American business repeatedly tries to sneak.
The profession of discovering and exploiting loopholes is both intellectually and financially rewarding. It is also eminently respectable. Some of the nation’s most erudite and honorable people do it. Those who play the game on the other side—the lawyers and middle-level bureaucrats within regulatory agencies and pertinent congressional committees—are simply trying to realize a simple and often sensible congressional mandate. Honor and financial reward will come to them later on, moreover, if they have gained a reputation for expertise and adroitness. The best law firms and largest corporations will hire them out of government, paying them many times their government salaries, to outwit their successors.
Washington lawyers who advise American business have a certain stake in the profusion of regulatory detail. When an area of regulation, like noise pollution, is compounded by such maneuver and countermaneuver into volumes of detailed statutory language, rules, interpretations, and opinions, it becomes accessible only to those, like Seymour and his tenacious opponents inside the agency, who have spent long hours refining it. The very complexity of the area generates new business and further elaboration. Soon every major corporation whose activities touch upon the area of law must have tactical advice about it. Seymour and his younger partners (who had once enforced EPA regulations on noise pollution) are sought out. Their practice mushrooms.
Unlike the story of the “new class,” there are no plotting villains to this tale, which makes it far less satisfying. Seymour and other lawyers like him have no intention of confounding American capitalism. Seymour does his job as he understands it, and is good at what he does. Henry and other chief executives are no revolutionaries either. Henry also is trying to do his job, protecting his company’s interests. Indeed, Henry has a responsibility to his shareholders to do whatever he can, within the limits of the law, to maximize the firm’s profits. If he did not hire good lawyers to maneuver around statutes and regulations that were open to such circumnavigation, Henry might be found liable for breach of fiduciary duty to his shareholders, or he might be taken over by someone with fewer scruples about exploiting every possible route to higher profits. Every actor in this sad and silly tale is simply carrying out the responsibilities assigned him within a set of rules that we all have accepted.
The story, exasperatingly, suggests no obvious plan of action. For any fundamental improvement to occur would require a broader definition of responsibility by which businesses would not simply yield to the letter of the law but endorse its spirit, or else openly challenge the goals underlying the laws. And the story promises no happy ending, because such a change in attitude and practice will be difficult to achieve. Business executives like Henry, lawyers like Seymour, shareholders and regulatory officials alike, act on the expectation that American business will try to outmaneuver government. As thrust meets parry, the miasma of regulation thickens.